Monday, August 31, 2009

As I noted in my first posting of the month, August 2009 marks the 150th anniversary of the first commercial oil well. Edwin Drake's well in Titusville, PA hit "paydirt" on August 27, 1859, and the world has never been the same since, though it took decades for oil production to grow beyond levels that would seem trivial today. In its early years the price of oil was even more volatile in real terms than it has been recently, as new sources of supply and new markets repeatedly swung the industry from boom to bust and back again. That led to numerous business failures, consolidations, and the eventual domination of a few large players. Although the world is quite different today, and history rarely repeats itself exactly, there might still be some lessons for alternative energy firms in the early history of the incumbent industry they are attempting to unseat.

Oil statistics back to 1859 are a little shaky, though this chart of oil's annual production history provides a useful overview of the early trends, if we ignore the portion devoted to projecting future output. From its current position of energy dominance, it's easy to forget that the initial success of oil was hardly a foregone conclusion, and its biggest early gains were matched by serious setbacks. While oil has never relinquished the lubricant markets it captured early on, kerosene met a very different fate. It was the most important oil product for several decades, rapidly penetrating illumination markets and displacing whale oil, which was facing its own imminent Peak Oil by then. However, it's no accident that one of the most important early markets for my former employer, Texaco Inc., which along with many other firms grew out of the great gusher at Spindletop, TX more than 40 years after Drake's well, was "oil for the lamps of China." By the early 20th century the US lighting market was already being swept by electrification. Oil was rescued from impending oblivion when a relatively unimportant byproduct called gasoline found its "killer ap" in the early automobile.

As impressive as the growth rates for wind and solar power have been over the last few years, they still fall short of the early growth of car ownership. Between 1901 and 1916, annual US car registrations grew from a few thousand units to over one million, a sustained compound average growth of around 40% per year. Over the same interval, oil production more than quadrupled, led by the combination of soaring demand for gasoline, which was produced by simple distillation of petroleum in "tea kettle" refineries, and the discovery of numerous large oil fields. This remarkable growth wasn't spurred by government incentives or economics that made oil and its products merely a little better than their closest competition. It was the result of a quantum leap in personal mobility facilitated by oil's extraordinary inherent advantages in convenience. Huge surpluses of energy could be extracted from the ground and delivered relatively easily and cheaply to cars in the most remote corners of the country.

The difference in oil's success in the transportation and illumination markets is clear. In modern terms we'd say that two transformational technologies competed head to head, with each ultimately dominating the market in which it had clear advantages of better/faster/cheaper. Kerosene, which lost to electric lighting, is only important today because it turned out to make a wonderful fuel for a device that didn't exist in Drake's time, the jet engine. And it has taken a further century for the technology of electricity to advance to the point at which it is again competitive in transportation, having once lost that battle definitively a century ago, with the mass production of the Model T.

The lessons for today's energy situation are worth contemplating. For example, ethanol has just experienced a boom and bust cycle that the early oil barons would readily understand. Over-investment in capacity still destroys margins, and distribution remains a serious constraint. More importantly, perhaps, ethanol lacks a better/faster/cheaper edge as it fights for market share with petroleum products. Must true success for biofuels await innovations that will turn cheap cellulose into molecules that carry energy at least as efficiently as those in oil, or for the mass production of new conversion devices (engines or fuel cells) that can overcome ethanol's shortcomings relative to gasoline? Oil's history poses similar questions for wind and solar power, which for all their environmental benefits remain costlier and less reliable than conventional sources of electricity. Subsidies and regulations seem anemic substitutes for the inherent advantages of cost and convenience that can sweep away incumbent technologies within a decade or two. I can't help wondering whether the story of today's alternative energy technologies will more resemble that of oil's experience in illumination or in transportation.

Friday, August 28, 2009

Even before the advent of partially- or fully-electric cars, it was becoming increasingly apparent that the old fuel economy metric of miles per gallon isn't as useful for measuring energy consumption in vehicles as when it was first codified in the original Corporate Average Fuel Economy standard in the 1970s. That is due in part to the proliferation of new fuels--E85, LPG, LNG, CNG, methanol, and hydrogen--but also because expressing the relationship between distance and volume in this way obscured the diminishing returns to higher levels of fuel economy. As a Wall St. Journal column earlier this week put it, adding electricity into the mpg mix, "risks giving consumers inaccurate information about the financial and environmental costs of driving." But if we need a new metric, what should it measure?

I've been interested in this issue for some time, and GM's recent announcement that its new Volt plug-in hybrid achieves 230 mpg in city driving prompted some further thought. I don't doubt the accuracy of that figure or the thought that GM's engineers put into bridging this new vehicle type into a system that was designed when the average US fuel economy was 13.1 mpg and unleaded gasoline was the newest fuel around. Yet all this figure tells us is how much liquid fuel the car's generator would consume over a carefully-chosen driving interval, completely ignoring the electricity--with its cost and consequences--required to deliver that result. Nissan's Twittered riposte that it's new Leaf electric car gets 367 mpg is even less useful, because the assumptions behind it are not clear--and might just ignore some basic engineering realities.

Without access to Nissan's calculation, I can only guess at how they might have arrived at it by backing into it. (Skip this if you hate numbers.) Start with the fact that each gallon of petroleum gasoline (without ethanol) carries 115,000 BTUs of energy. At an official conversion of 3412 BTUs per kilowatt-hour (kWh), that equates to 33.7 kWh per gallon, so 367 mpg implies that the Leaf would go nearly 11 miles per kWh. That's pretty amazing by itself, considering that the Volt is generally expected to go between 4 and 6 miles per kWh. It also suggests that the Leaf would be using less than half of its 24 kWh Lithium Ion battery pack to deliver its advertised 100 mile range. But even if this is all correct, there's a basic problem with the calculation; in the real world it can take a lot more than 3,412 BTUs of primary energy to generate one kWh of electricity, depending on how you do it. If the power source is surplus wind, solar or nuclear power that wasn't already being used to displace power generated from fossil fuels, the BTUs required could be effectively zero. Otherwise, for power generated from coal or natural gas they would range between 6,000-12,000 BTU/kWh. Even assuming a relatively conservative 8,000 BTU/kWh for the natural gas turbines that provide the incremental power supply for many markets, the resulting equivalent mpg falls from 367 to 156 mpg. But that still doesn't tell us enough, in my estimation.

The problem here is the existence of a variety of perspectives on vehicle energy efficiency with competing information needs. From the standpoint of energy policy, we are most concerned about annual oil consumption and greenhouse gas emissions. We already have a new federal mileage standard that is set in terms of grams of CO2-equivalent per mile, which gets at the latter issue. The EPA's current mpg methodology based on liquid fuels comes close to addressing the former, though the increasing contribution of biofuels renders it suspect. Unfortunately, any standard or metric that treats non-petroleum energy as essentially free seems certain to result in colossal unintended consequences, as non-oil energy sources ramp up. The engineer in me would argue strongly for something like the MPGe calculation used for the Automotive X-Prize, comparing all the energy delivered to the car in any form with how far the car went. However, from a consumer perspective that still seems overly complex and opaque. While I would certainly prefer the inverted form of fuel economy--gallons per 100 miles--to our current mpg, it's hard to beat miles per dollar as a means of comparing how much it will cost the average driver to operate any of these new cars.

Money is the common denominator for most of the things we consume, so why shouldn't it be for vehicle energy, as well? At current pump prices, an average American passenger car goes about 9.5 miles per dollar (mp$), while a Prius-type hybrid approaches 20 mp$. If we factor in electricity at the national average retail price of $0.11/kWh, then the Chevrolet Volt would deliver something in the vicinity of 30 mp$, if I've correctly understood how they arrived at their 230 mpg figure, while the Leaf might yield as much as 99 mp$--though my natural skepticism about its unofficial claims leads me to suspect it would be closer to 45 mp$. Of course, when you have to pay $5,000-10,000 extra for a battery pack, you'd certainly hope the operating cost per mile would be a lot lower than for a conventional car. And that's precisely the kind of comparison that a truly useful fuel economy metric should facilitate.

In the near term, the EPA should continue its work on adapting the familiar mpg metric to a new world of more diverse vehicle technologies, but for the longer term it ought to convene other government agencies, car and fuel companies, universities, and consumer groups for the purpose of developing a new and more helpful set of metrics that would tell consumers what they need to know about costs and consequences as the car fleet undergoes its long transition toward an uncertain destination.

Wednesday, August 26, 2009

The latest revision to the forecasted federal deficit has implications beyond the sustainability of current government spending. Reading a pair of high-profile, skeptical assessments of Peak Oil in the context of a $9 trillion deficit projection for the next decade, it occurred to me that the most serious risk of higher oil prices in the near future might not be flagging production or surging demand but the further depreciation of the US dollar. The quickest route back to $4 gasoline could run through Washington, DC, rather than Riyadh or Beijing, and that might not be as helpful for renewable energy as its advocates might guess.

The main worry I've heard expressed about the size of the federal deficit has focused on the risk of inflation. However, high deficits carry another risk that could have a much more direct effect on energy prices, which in turn could help re-ignite inflation. The problem is acute because it goes well beyond the one-time impact of federal stimulus efforts, which have apparently ballooned this year's deficit to $1.6 trillion. Fundamentally, there is a persistent and growing gap between government revenue and expenses, exacerbated by high unemployment and lower income--and thus lower tax collection--particularly from the top quintile of earners who have consistently been paying 86% of the federal income tax. Unless that gap can be brought back into line with recent history, the government will soon face a difficult choice. Financing a steady stream of trillion-dollar annual deficits will require either interest rates high enough to attract investment from all over the world--and thus high enough to stifle a nascent recovery--or the monetization of the debt by means of the Federal Reserve printing even more money than recently. The latter course, which seems likely to be more politically palatable, despite Dr. Bernanke's reappointment, would inevitably weaken the dollar and lead in fairly short order to higher energy prices.

We got a taste of this effect in 2007, when oil prices and the dollar moved in opposite directions in an oil-dollar price loop that looked more than merely coincidental. A weaker dollar encourages producers to raise prices, or to consider pricing their output in a stronger, more stable currency. Meanwhile, non-US consumers experience stable or falling energy prices that encourage demand growth, which eventually leads to higher prices in all currencies. Either way, US consumers would see higher prices for petroleum products, though it's not clear how much further demand could fall in the near term, with US oil consumption already running 10% below 2007's, on a comparable year-to-date basis.

The dollar has already weakened by about 10% against the Euro and 5% vs. the Japanese Yen since March, as the resolution of the financial crisis and early signs of a global recovery have eased the fears that prompted a classic flight to dollar safety. This shift merely returns the exchange rate to roughly its level of pre-crisis 2008. Oil prices have risen by around 40% over the same interval, though how much of that is due to a weaker dollar is far from clear. However, from today's $70/bbl level, another 25% drop in the value of the dollar could return us to the threshold of $100 oil.

Higher oil prices due to a weaker dollar would not necessarily be beneficial for biofuels and other alternatives to oil, either. If we learned anything from the oil price spike of 2006-'08, it was that higher oil prices don't automatically make alternative energy more competitive. If only oil prices were moving, it might be helpful, but the only way to achieve that is through taxation, not inflation or currency depreciation. Just as oil functions in a global market, so too the components of the main alternative energy technologies have become global, with wind turbines and solar panels sourced globally and in high demand in many regions. So too for the steel and other basic materials for constructing such installations, as well as the grains and oilseeds turned into ethanol and biodiesel. A weaker dollar wouldn't just mean higher oil prices, but higher prices at least for all of the new energy sources to which we are turning in our effort to address climate change and bolster our energy security.

At an average price for 2008 of $93/bbl, oil made up just 15% of the value of the goods and services we imported last year, and a weaker dollar would see the prices of a host of other things--cars, electronics, call-center assistance, for example--go up, as well, fueling inflation and further depressing our standard of living. That scenario is hardly inevitable. A sea change on the part of the American public could convince the Congress and administration that we are finally prepared to pay for the government we have been demanding, or to see government services fall to a level commensurate with the level of taxation we appear willing to bear. Or the Fed could start raising interest rates to defend the dollar, in spite of the consequences for economic growth and unemployment. I'm pretty sure which choice I'd vote for.

Monday, August 24, 2009

A new study confirms my previous suspicions that the allocation of free emission allowances in the Waxman-Markey climate bill would disproportionately disadvantage the US oil sector, with serious consequences for our energy security. In particular, it quantifies the impact on the refining sector, which was chosen by the bill's authors as the focal point for collecting the "tax" on all carbon emissions from the use of petroleum products. In the view of EnSys Energy Systems, Inc., based on their model of global downstream petroleum markets, US refineries would run much less crude oil and be able to invest much less in modernization. As a result, US imports of refined products would grow significantly, despite lower overall consumption, and employment in the US refining sector would fall, while the reductions in greenhouse gas emissions from domestic refineries would be largely offset by increases abroad. Such an outcome would benefit neither the global climate nor US national security.

When I examined the preliminary version of Waxman-Markey in early June, I concluded that because it doled out so many free emission allowances to the electricity sector, its main effect for at least the first two decades would be to function as a tax on the petroleum sector, though without the clarity and transparency of a gasoline tax. Those allocations didn't change materially during negotiations, with the final House bill offering roughly 2% of emission allowances to refineries that would be saddled with the responsibility for between 33% and 44% of all US GHG emissions, depending on how you slice them. Compare that to the electricity sector, which accounts for 39% of emissions but would get at least 35% of the free allowances.

Rather than going through the details of the EnSys study, which was commissioned by API, I'd like to approach this by considering how an evenly-distributed cap & trade system (or carbon tax) should reasonably be expected to affect the oil industry, which after all accounts for a major share of US emissions. You'd hardly expect it to get off scot-free. However, it's a fact that most emissions in the petroleum value chain occur when refined fuel is burned, rather than during production (extraction) or refining. The Ensys study puts the refining contribution at less than 10% of all emissions from well to wheels. Although refiners ought to see their operating costs rise under cap & trade, giving them further incentives to increase their already impressive efficiency of roughly 90% (energy out vs. energy in), the impact should properly be relatively modest. The bulk of the impact from cap & trade should manifest in the form of higher end-user prices for gasoline, diesel and jet fuel, putting commensurate pressure on consumers to use less. The outcome of that reduction would fall on the marginal suppliers of refined products to the US market: foreign refiners that sent us over 3 million barrels per day last year. EnSys concludes that Waxman-Markey would have entirely the opposite result, enriching foreign refiners at the expense of the employees and owners of US facilities.

I wouldn't be surprised if the EnSys study were greeted with the customary skepticism of a finding that supports the interests of the constituency that paid for it. API and its member companies have much at stake in this debate. But if you doubt the likelihood of the scenario it describes, you need only review the regulatory history of the US refining industry and the long-term trend of our refined product imports, which have increased at double the rate of our crude oil imports. Between 1993 and 2007--before the recession axed them--net US refined product imports (after subtracting out exports) grew by a compound average rate of roughly 6% per year, compared to an average increase of 3% per year for net crude imports over the same period. This coincided with increasingly strict regulations on permits for new facilities and on refinery emissions of criteria pollutants, along with ever-tougher rules on gasoline and diesel fuel specifications, culminating in the current reformulated gasoline and ultra-low-sulfur diesel specs. With the exception of a couple of years of stellar margins late in that interval, returns on refinery investments were very poor, and the major oil companies were steadily shedding refining capacity as a bad bet. Today, even the independent refining companies that created profitable businesses by purchasing these assets at a fraction of their replacement cost are suffering from low profits.

If anything, the economic impact on the US refining industry from regulating carbon emissions could be even worse than this recent history, since it hinges on the basic chemistry of combustion itself, rather than the removal of impurities that constitute only a small percentage of their feedstock inputs, even for the highest-sulfur crudes. That could happen even with an even-handed approach to cap & trade or a carbon tax, but it would be a certainty under a system that appears designed mainly to shield utilities and their customers at the expense of the entire existing transportation fuel system. The principal means of reducing GHGs from the latter is through cuts in consumption, not more efficient refining, and even our recent low level of product imports offers the opportunity to cut our emissions from petroleum products by roughly 7% with a minimal effect on US refineries. Instead, Waxman-Markey would effectively offshore many of those refineries--and their emissions. In a world transfixed by market failures, that would constitute a regulatory failure of the first magnitude.

Friday, August 21, 2009

In the last few years I've watched perceptions of US energy security and climate change, the two main drivers of energy policy, converge gradually toward a general sense that smart climate policy will be good for energy security, and vice versa. There's even a growing understanding that a stable climate contributes to national security, distinct from any energy considerations. However, there are still cases with strongly divergent energy security and climate change implications, and a new pipeline that will deliver crude extracted from Canadian oil sands is a prime example. The US State Department's approval of this project looks entirely appropriate and sensible, even if it conflicts with the administration's emphasis on reducing greenhouse gas emissions. Like it or not--and largely because of past decisions concerning our own off-limits oil resources--Canadian oil sands have become an essential pillar of US energy security.

The "Alberta Clipper" pipeline of Enbridge, Inc. could eventually bring up to 800,000 barrels per day of Canadian crude oil to refineries in the US Midwest, as oil sands production in Alberta Province continues to grow. This oil would displace imports from the Middle East and West Africa, which absent oil sands are likely to grow, in spite of increasing biofuel production and higher fuel economy standards for new cars. That's because output from Mexico, our other main local supplier, is dropping sharply, while higher production from Brazil may only offset declines in Venezuela, which has grossly mismanaged its oil sector. Oil sands are already compensating for the steady decline in conventional Canadian oil production, and without them our imports from our largest oil supplier couldn't be sustained at their current level of roughly 10% of US oil consumption--equating to about five times the energy content of current US ethanol production. There is simply no realistic energy scenario for the next 20 years in which we could forgo imports of Canadian crude produced from oil sands, without a corresponding increase in imports from the Middle East.

The main concern cited about oil sands relates to its higher emissions of greenhouse gases, compared to conventional oil production. This is indisputable, though it's important to put those higher emissions into perspective, while also recognizing that technology and an increased Canadian emphasis on these emissions should reduce this disparity over time. The most recent study I've seen on the subject indicates that although the processes for producing useful liquids from Canadian oil sands result in roughly three times the upstream greenhouse gas emissions of the average barrel of US supply, the well-to-wheels lifecycle emissions are only 17% higher than average. In either case, most of the emissions from oil occur when it is burned in vehicles or other end-uses, not during production. While not insignificant, the excess emissions from oil sands can be offset less expensively elsewhere in our energy economy, particularly if the ultimate US climate legislation gives the utility sector the right incentives to cut its CO2 emissions, which are roughly a fifth larger than those from oil consumed in transportation.

Greenhouse gas emissions aren't the only environmental impact associated with oil sands, but we lack any reasonable or consistent way to assess the trade-off between the others and the potential impacts--physical or aesthetic--of increasing our own oil production from the significant resources we have placed off-limits to exploitation, including the Arctic National Wildlife Refuge and the outer continental shelves of California and other states. In effect, American policy makers and consumers have implicitly chosen to ramp up oil output in Alberta to spare other areas of greater concern to American voters. Such decisions have left us reliant on this Canadian energy resource, the incremental greenhouse gas consequences of which can be offset elsewhere. The State Department appears to have reached a similar conclusion.

Wednesday, August 12, 2009

An emailed link I received the other day led to a fascinating article featuring a truly eyebrow-raising statistic. According to the Center for Public Integrity the number of companies and groups now lobbying the US Congress on the subject of climate change has passed the 1,000 mark with room to spare, standing at 1,150 as of the second quarter of 2009. Now, in one sense that figure shouldn't surprise anyone; the pending legislation on greenhouse gas emissions would affect nearly everyone in America, directly or indirectly, and it would be remarkable if numerous firms and organizations didn't want to help shape the rules that will govern our future emissions. But let's not kid ourselves. There's more than altruism behind such activity, and the last few Congresses have encouraged it with an approach that turns important legislation such as this into a potential bonanza for favored sectors and groups. In addition to its primary economy-revamping aspects, the climate bill puts hundreds of billions of dollars in tax credits, subsidies, and direct research, development and deployment investment up for grabs, while levying massive sums to pay for it all. Deft lobbying could yield huge rewards or savings.

Browsing through the search function on the Center for Public Integrity climate change site turned up a fascinating array of companies and groups lobbying the Congress on this issue. Traditional energy firms are well represented, including both resource/refining companies and a large number of electricity suppliers and their trade associations. In a sign of the growing strength of the renewable energy sector the list includes not just the expected alphabet soup of "trades" such as AWEA, ACORE, RFA, and SEIA, but also individual biofuel, wind, solar, fuel cell, and synthetic fuels companies. If this fight drags out, or the SEC follows through on threats to force companies to disclose their potential climate change liabilities, the list of participants seems likely to grow even longer.

Nor is it just industrial concerns seeking to protect their interests or capture a piece of the new pie; organizations ranging from AARP to the Water Research Foundation and including, of all things, the National Turfgrass Federation want to be heard on this issue. Then we have agricultural interests, who as the article describes achieved a very valuable save for the ethanol industry in the House at the climax of the Waxman-Markey negotiations. If you're interested in seeing who else is represented and how much they've put into this fight, I encourage you to browse this useful database and its pre-set reports.

I don't blame companies for chasing the plums that Congress is offering. There's too much at stake for many to eschew that pursuit on principle. I do wonder, however, whether this could possibly be the best way to embark on what looks like the most important change in our economy in the last several decades. The outcome now rests with the US Senate. If it is willing to challenge the House over a distorted system for allocating free emission allowances, and the agricultural lobby on requiring corn ethanol to demonstrate that it actually improves global greenhouse gas emissions, compared to petroleum-derived fuels, while rationalizing a plethora of marginally-related provisions, then we might get a climate bill that puts a price on emissions without contorting the economy more than the minimum amount necessary to achieve that end. Otherwise, we will end up with legislation that will tell us more about which sectors and groups wielded the most influence in Washington, DC this year than about how best to cut emissions.

Note: Energy Outlook will be on vacation for the next week or so. New postings should resume on 7/21/09.

Monday, August 10, 2009

An article in the Washington Post this weekend, together with a must-read interview in The Independent, a paper I used to read regularly when I lived in London, reminded me of an observation I made several years ago concerning the similarities between Peak Oil and Y2K. Having spent a fair amount of time in my former corporate role planning for the serious outcomes the latter might have produced, I don't intend this as a slam on the former. Without rehashing the technical arguments behind either phenomenon, it's worth spending a few minutes thinking about the consequences of a growing belief that we might be only a few years away from the end of oil, as we know it. Whatever one's take on the validity of the Peak Oil argument, it has already evoked noteworthy consequences, both positive and negative.

A week ago The Independent ran an interview with Fatih Birol, chief economist of the International Energy Agency (IEA). In it Dr. Birol repeated a warning he has issued previously, that higher-than-expected decline rates in the world's mature oil fields and "chronic underinvestment by oil-producing countries" are setting up a severe oil supply crunch within the next few years, as a recovering global economy resumes its growth in energy consumption. It's not hard to imagine the "green shoots" withering if oil reprised its 2007-8 march from around $70/bbl to nearly $150. From the supply side, I have little doubt that this is correct, for reasons I've mentioned frequently in the past: restrictions on access to resources, routine diversion of national oil company profits into social budgets at the expense of reinvestment, chronic project delays, and the inherently long timelags between discovery and production. I'm less convinced that the demand side of the equation would play out the same as last time, with that experience so fresh in our minds. At the very least, though, Dr. Birol describes a highly credible scenario, and belief in its likelihood could have far-reaching consequences, good and bad.

On the plus side, our reactions needn't go to the extent of the author of a Washington Post piece, searching for self-sufficiency on a small farm in New Mexico, to have a beneficial impact on consumption patterns. Our best chance of avoiding the apocalyptic outcomes that Mr. Fine fears is to live our lives on the assumption that the days of cheap oil are indeed past, and that it will be more expensive in the future. From initial reports of the transactions involved in the Cash for Clunkers program, many people already sense this, despite gasoline prices that remain one-third below where they were at this time last year. And while I certainly don't advocate survivalism as an indicated strategy for individuals, everyone who chooses to downshift in this way stretches out the supplies available for the rest of us, making the transition to more sustainable energy sources more manageable. Merely being prepared mentally for another oil crisis might reduce the likelihood of counterproductive behavior, such as hoarding, should we find ourselves in one.

Unfortunately, these psychological effects also point to the main downside of a widespread belief in imminent Peak Oil. While I remain unconvinced of the role of speculation in last year's spike in physical oil prices, to whatever extent the s-word was driving prices on the oil futures exchanges it was underpinned by a pervasive mentality that we were experiencing something truly unprecedented, backed by hints that oil supplies had already reached their natural limit. If you believe in the inevitability of Peak Oil, today's oil futures prices must look like a buy--a steal, even at levels over $90 for delivery in 2016 or 2017.

There are many good reasons to invest in the alternative energy sources that would help mitigate a true Peak Oil crisis down the road, and that hold the seeds of eventually escaping from that threat entirely. The real mark of success for our various renewable energy, nuclear renaissance, and energy efficiency efforts would be the eventual arrival of a peak in global oil output without crippling the economy. However, the dark side of Peak Oil is a self-defeating notion that no amount of increased investment in new oil production can make any worthwhile difference in this outcome.

If the IEA is right, we certainly can't escape this pickle by drilling alone. However, it's equally true that if oil production began to drop in the next few years, no other strategy, by itself or in combination--not even dramatic improvements in energy efficiency--could make a big enough difference to avoid a serious, economy-wrenching crisis. Many of the cars on the road in 2015 will either be those already on the road today or others very similar to them, if a bit thriftier with fuel. Nor could we electrify more than a small fraction of the global car park within that timeframe, let alone a US car fleet of 245 million vehicles at a time when sales (and thus turnover) have collapsed. Double today's biofuel output--which in that timeframe mainly means more corn ethanol, with all its problems--and we still won't have made a big enough dent.

Inescapably we will need as much more oil as we could eke out, because the whole world would be going through this transition at once. If we're saving the oil in ANWR, offshore California, and the Eastern Gulf of Mexico for a rainy day, then imminent Peak Oil would be that deluge, and it takes 5-10 years to go from bidding on leases to full production. Even if this bought us only an extra 1 million barrels per day--Mr. Pickens apparently thinks twice that--the value of that to the US in a world of $200 oil would be $73 billion/year in today's dollars, along with the possible preservation of critical services if the shortfall that went beyond a mere price spike. The US can't make up for the problem of "chronic underinvestment by oil-producing countries" of which Dr. Birol rightly warns, but we could certainly exacerbate it through deliberate under-investment in our own oil capacity.

Thursday, August 06, 2009

Yesterday's photo-op at an Indiana RV factory for the purpose of announcing more federal assistance for the electric vehicle industry came just a few days after Nissan debuted its Leaf electric car, which might become the first mass-market EV in the world. Cars powered by batteries alone or a combination of batteries and conventional engines look like one of the most promising long-term solutions to the dual problems of energy security and climate change. But precisely because of their potential to have such a large impact, it's vital that the economic arrangements for their energy consumption are put on the right basis from the start. Among other things, that means avoiding the temptation to provide free public recharging for them. If we get this wrong, we risk negating much of the energy and greenhouse gas benefit these cars offer. We could also inadvertently deter the substantial private investment in recharging infrastructure that would be needed to make EVs fully competitive with cars running on liquid fuels.

Against the backdrop of $2.4 billion in new subsidies for EV and battery manufacturers and federal electric vehicle tax credits ranging up to $7,500 per car, my concerns about collecting for the electricity actually used by the first few mass-production EVs might seem disproportionate or even eccentric. After all, how much juice can a few battery cars use, compared to our factories, office buildings, and billions of home appliances? Initially, very little and eventually still less than you might imagine. If every vehicle-mile traveled in the US were driven in an EV averaging 3 miles per kilowatt-hour (kWh), US electricity consumption would only increase by about 27%. The impact on emissions is much harder to assess, however, since it depends heavily on which generating technologies deliver the power used by EVs, and that in turn depends to a large degree on the time of day when they are recharged. Charge up at 3 AM, and you might be getting zero-emission wind power that would otherwise go to waste. Charge up at 3 PM, and you are almost certainly going to be drawing on a gas turbine somewhere--probably a fairly inefficient "peaking" unit--or a coal power plant. To put that in perspective, let's look at the emissions from two comparable cars, under both scenarios.

For our baseline, consider a Prius-type hybrid that gets all of its energy from the fuel that goes into its tank. At 50 mpg, its emissions from gasoline amount to roughly 40 lb. of CO2 per 100 miles. For an EV getting 4 miles per kWh and recharged with wind power, they would be essentially zero. However, the same car recharging during mid-peak or peak electricity demand would trigger power plant emissions between 35 lb. ("peaker" turbine @ 12,000 BTU/kWh on natural gas) and 53 lb. (average US coal plant) for every 100 miles. In other words, while the hidden emissions from an EV would in the worst case still be lower than those of the average car in America today (around 80 lb. CO2/100 mi.), they could be substantially higher than from an ordinary hybrid that never plugs in. So if we want EVs to repay the substantial national investment we're making in them by reducing our fossil fuel consumption and greenhouse gas emissions, we will want them to recharge as little as possible during daylight hours, particularly in the late afternoon, at least until wind, solar and geothermal power account for a much higher share of our annual electricity generation than the 1.6% they contributed last year.

Paying for the electricity to recharge plug-in electric vehicles involves major cultural and behavioral shifts. The price of gasoline is one of the most visible, ubiquitous and transparent prices in our society. You stand at the pump and see the dollars going into your tank. But when you recharge an EV at home, unless you have a separate electric meter, you're going to have to sift through a power bill with a welter of distribution, fuel and non-fuel supply charges plus various state and local taxes and fees to see what it actually cost. At the current national average rate of around $0.11/kWh, a typical driver might only see an extra $27 a month, a big savings compared to the typical gasoline bill even at the current $2.55/gal. The extra power cost could easily get lost in seasonal usage fluctuations and rate changes. The impact would likely be more noticeable for utility customers in places with sharply graduated rate structures or time-of-use rates. For many people, however, even if they don't charge up using someone else's electricity--their employer's, their town's, or the local Starbucks'--it could look nearly free.

That would have implications for companies that are building vehicle recharging infrastructure that would need to recoup their investment on a per-kWh basis or, like Better Place, charges per mile of usage in a manner similar to cellphone service contracts. Those investments won't happen and the companies involved will go out of business if consumers regard the electricity for their new plug-in vehicles as effectively free and resist paying as they now do for fuel.

How this will all turn out is anyone's guess at this point, and I emphasize "guess." Until there are at least hundreds of thousands of these vehicles on the road, in the hands of many ordinary consumers and not just unrepresentative deep-green or "gear-head" early adopters, we can only make assumptions about how they will really be used. Still, it seems safe to predict that recharging that was free or regarded as free would get used more, resulting in more trips, more miles traveled, and eventually more energy consumption and emissions.

Tuesday, August 04, 2009

I have to admit to being somewhat bemused at the apparent success of the "Cash for Clunkers" scheme, which burned through its initial $1 billion of funding so rapidly that Congress is still scrambling to find more money for it before leaving town. Although the final version of the program wasn't quite along the lines of the idea I supported back in January, it appears to have produced much more useful results than most critics predicted when it looked as if it would mainly move Americans out of old SUVs and into new but minimally-thriftier ones. Given its popularity and the boost it's provided the flagging car industry at just the right time, I very much hope the Senate will pass an extension before escaping the August heat and humidity here.

Let me briefly focus on a few key points concerning the program and its funding. If the report I saw in Bloomberg is correct in showing an average fuel economy improvement from 15.8 mpg for the clunkers that were junked to 25.4 mpg for the new cars that are replacing them, that works out to an impressive annual fuel savings of around 280 gallons for the average driver. That's more than the average Prius driver uses in total. Aggregate that across approximately a quarter-million new cars and it works out to 70 million gallons per year--impressive-sounding but still a relative drop in the bucket in a fuel market of 138 billion gallons per year. The corresponding CO2 reduction would be around 700,000 tons per year, which if you figure the cars removed from the road by this program likely only had a few more years of high-intensity usage left in them yields a CO2 abatement cost in the region of $475/ton. As climate policy, this wins no prizes.

However, despite the immense seriousness of that issue, climate surely can't be the only lens through which to view a program such as this. In particular, when you examine the way the House of Representatives came up with the $2 billion to stretch it through the end of September, it is clear that they viewed it as an extension to--or more properly an acceleration of--the federal economic stimulus. Their bill, which is a model of brevity and simplicity, shifted $2 billion from a $6 billion appropriation for DOE loan guarantees to advanced energy projects. Considering that the DOE still has yet to dole out all the money originally appropriated for this purpose when it was funded under the Energy Policy Act of 2005, and that their highest-profile decision so far was to turn down an application from a major nuclear fuel processing project in Ohio, it seems fair to say that Cash for Clunkers will get this money into the economy vastly quicker than under a stimulus program that has taken its own sweet time about stimulating anything.

As New York Times columnist David Brooks described Cash for Clunkers in last Friday's weekly segment with Mark Shields on the News Hour, "It's costing some billions of dollars, but it's actually temporary, timely and targeted, so I'm all for it." Despite the program's reported administrative glitches, Mr. Shields liked it, too. That may be as close to a bi-partisan consensus as we are likely to get all summer.

Monday, August 03, 2009

Picking up where I left off in Friday's posting addressing the issues raised by ABC's recent "Over a Barrel" report, concerning what Americans ought to know about oil, let's turn to the products that we get from it. Over the course of a century and a half of production--this month marks the sesquicentennial of Drake's well--petroleum has provided us with a cornucopia of fuels, lubricants, and raw materials for industry, many of which grew out of the search for substitutes for other, scarcer commodities or the availability of low-value byproducts from earlier, less-sophisticated refining techniques. In recent years, however, we've acquired a greater awareness of oil's adverse consequences, and it has attracted its first serious competition in many decades in its primary transportation fuels market.

The gasoline we put in our cars, the diesel that fuels trucks and buses and heats many homes, especially in the Northeast, and the jet fuel we can sometimes smell when the plane on which we're traveling has just refueled together accounted for 74% of the 19.5 million barrels per day of petroleum products consumed in the US last year. Throw in propane, lubricants, asphalt, petrochemical feedstocks and solvents, and you're up to around 90%, with most of the remainder coming out as heavy fuel oil for ships, petroleum coke (a solid, coal-like fuel,) and the fuel used by refineries in their processing. The average US refinery is 90% efficient, meaning that 90% of the energy that goes into it comes out in the products it sells, while the other 10% is consumed along the way. Greenhouse gas emissions follow a similar pattern, with the majority occurring not during processing but in the subsequent use of the products.

That's a crucial factor in the effort to reduce emissions. In the recent estimate of last year's US CO2 emissions, nearly 80% of oil's 42% share of the CO2 emitted by fossil fuels came from the combustion of transportation fuels. That means that by far the largest opportunities to reduce emissions from oil are associated with vehicle efficiency, not changes in refinery processes, which are already quite efficient. So while reducing direct refinery emissions by 1/3 would only cut total oil-related emissions by about 3%, increasing the efficiency of cars, trucks and planes by 1/3 would reduce those emissions by 26%. That is a realistic possibility, because most of our vehicles use these fuels so inefficiently. Although we can't easily reduce the 20 lb. of CO2 emitted from the combustion of each gallon of gasoline, we can certainly reduce the number of gallons we burn per mile.

If you asked most people why gasoline has been such a successful fuel for the last century, you'd get a variety of answers, including some entertaining conspiracy theories, but relatively few would zero in on the fuel's remarkable capacity to deliver lots of energy in a compact and easily portable form. Every gallon of E10 gasoline (10% ethanol blend) you put into your car carries roughly 110,000 BTUs, compared to 82,000 BTUs for the E85 ethanol/gasoline blend, or 66,000 BTUs for an 85% methanol/gasoline blend. Those extra BTUs translate into range and convenience, even though the typical internal combustion engine vehicle throws away roughly 80% of them as waste heat and other losses. That's why there's such a big opportunity for hybrids, advanced engines and transmissions, and other technologies to improve the fuel economy of most cars, if consumers are willing to pay the higher up-front costs. It's sobering to think that the advanced battery pack for GM's highly-anticipated Volt plug-in hybrid will hold the energy equivalent of just a half-gallon of gasoline, though the car's electric motor will use that energy much more efficiently than an internal combustion engine would.

So what are you buying when you fill up at the pump? If you watched "Over a Barrel", you probably got the impression that you are paying for an entirely generic fuel, a moderate slice of taxes and dealer margin, and a whole bunch of advertising and other marketing expenses. That's misleading on a couple of levels. It's true that the basic fuel is indeed generic--"fungible" in industry parlance--for the very good reason that this facilitates efficient pipeline shipment and inter-company purchases and exchanges to cover refinery problems and demand fluctuations, while reducing bulk transportation costs. However, there are real differences in the additives injected when the tank truck picks up a load of fuel at the distribution terminal, when the fuel becomes some company's branded product. If you own a newer car with a sophisticated engine, spending a little more to get a major oil company's additive package could pay off in better performance and reduced maintenance costs down the line.

But while the company from which you buy your gas might not have refined every gallon themselves, they must still stand behind it, and in my estimation that's the most important extra you're paying for. If you get a tank of bad gas or one blended with 20% ethanol instead of 10% and need to have your car's entire fuel system rebuilt, you stand a much better chance of getting compensated for the repair by a major gasoline brand than an independent or discount station. I consider myself fairly thrifty, but that's worth an extra 5-10 cents per gallon to me. I'll admit to a bias against buying gas from even a big supermarket chain for the same reason.

Finally, in terms of competition, it's ironic that the most viable competitor to gasoline at the moment is another petroleum product, diesel, which has captured half the new-car market in Europe and is getting a closer look here, thanks to some new technology. While biofuels hold great promise, they are still only available in relatively modest quantities, as explained in Friday's posting, and more as "hamburger helper" for traditional fuels than as fully independent alternatives to oil. While ethanol advocates would doubtless take issue with the characterization of E85 as a failure, so far, its sales have probably been hampered more by its poor value proposition--offering fewer miles per dollar than conventional fuels--than by infrastructure constraints and limited numbers of flexible fuel vehicles. In the long run, electricity looks like the strongest challenger, assuming battery prices come down and mainstream consumers find the trade-offs involved in recharging in hours rather than refueling in a few minutes acceptable.

If "Over a Barrel" accurately reflected Americans' frustration at being dependent on a commodity they feel they no longer control, it also highlighted oil's continuing indispensability. Petroleum and its products aren't about to disappear any time soon, though their dominance is starting to slip. From all indications, US oil demand has peaked, and the industry's remaining growth prospects are centered on developing Asia. The pressure to reduce oil consumption in developed countries is growing, and alternatives that were once dismissed will soon erode oil's share of the transportation energy market. However, absent a technology breakthrough, that transition seems likely to stretch out for decades, and it's a virtual certainty that the economics and geopolitics of oil will continue to frustrate us for many years to come.